Report Flags ‘Derisking Risk’ in Banking Sector

A new report from the Government Accountability Office says tough AML compliance obligations are contributing to a “derisking” wave in banks along the U.S.-Mexico border, which are closing branches and filing far more suspicious activity reports than in other parts of the country.

Those burdens, the report said, also drove banks along the Southwest to limit the services they would provide to certain types of customers that had high AML risks — a practice more commonly known as derisking.

Derisking happens when a bank reduces business with problematic types of customers to alleviate the bank’s regulatory obligations. For example, a bank might decide to cease business with all strip clubs, or pawn shops, or legalized weed sellers, because performing due diligence and monitoring on customers like that isn’t worth the cost.

Derisking can happen along the Southwest border because many businesses there rely on cash-heavy transactions that trigger AML red flags. For example, a U.S. firm might import produce from Mexico, where it pays the Mexican farm via international wire transfer, and the Mexican farm then immediately withdraws that money to pay its laborers in cash. That arrangement can also indicate money laundering, so therefore the bank involved has more AML compliance duties.

Keeping up with those potential risks is no easy task. For example, the report said, one bank along the border requires high-risk customers to submit three months’ worth of previous bank statements, so it can determine the size and frequency of wire transfers the new customer might want. Border banks are also more likely to encounter customers trying to evade the $10,000 threshold for banks to file reports to the IRS, by submitting more transactions of smaller amounts. Each transactions then requires attention.

The choice for banks is either to expend those additional compliance efforts, or to cut ties with those customers.

“Representatives from one Southwest border bank explained that they no longer offer accounts to money services businesses because they want to be viewed from a good standpoint with their regulator,” the report said. “They added that banking for these types of customers is very high risk for the bank with very little reward… Several Southwest border bank representatives also described how recent AML law enforcement and regulatory enforcement actions have caused them to become more conservative in the types of businesses for which they offer accounts.”

Derisking isn’t illegal per se, but statements like that fuel critics of the Dodd-Frank Act and aggressive regulatory enforcement — including many Republicans who represent districts along the Southwest border. They have been complaining about banking regulation smothering small community banks for years. Derisking can also drive criminal behavior even further outside the banking sector, making the perpetrators that much harder to identify and prosecute.

The GAO report stressed that derisking isn’t the principal cause of banks closing branches or curtailing services to certain types of customers. It only said that derisking seems to be afoot, an unintended consequence of increased AML enforcement.

“BSA/AML regulations have helped to detect money laundering and other financial crimes, but there are also real concerns about the unintended effects, such as derisking, that these regulations and their implementation may be having,” the report said.

The GAO report urged FinCEN and federal banking regulators to conduct a review of Bank Secrecy Act regulations, to see how much banks’ regulatory concerns might be affecting the banks’ willingness to offer financial services along the border.